Millennials are not investing for their future, either in the quantity or manner which they should be. 44% of 18–34 year olds have no provision for retirement, and 29% say they are saving but are unsure if its enough. In a separate survey, 38% said they preferred to keep their wealth in cash. There is a chasm between the accepted wisdom of the investment community and the practices of my generation.
I have seen this first hand. Four months ago I established Moneycado, a start-up committed to making great financial habits accessible for millennials. In the course of interviewing dozens of young people about their financial habits I found a consistent, underlying anxiety about needing to save for the future, and a distinct lack of knowledge about how to do so. For most, ad hoc transfers to savings accounts with ‘whatever is left over’ is the main strategy.
The implications of this are stark. For governments, already straining under the future liability of the Baby Boomers’ pension payments, it is critical that millennials take on a higher burden of their retirement savings. In the UK only 58% of public pension liabilities are funded, meaning that the current and future workforce will likely be paying for Baby Boomers’ retirement in the form of higher taxes. There is little to no fiscal capacity for governments to also assume this burden for future generations. This problem is pervasive across the OECD.
For millennials themselves, an inability to save will not only endanger retirement, but reduce flexibility during their working lives. 52% do not have enough money set aside to cover three months of expenses. How can they harbour aspirations such as world travel, or forgoing income to change careers without a cushion of funds? I would be the first to admit that good savings habits are not exciting, but the freedom that they enable definitely is.
What’s causing this disconnect? The traditional answer is low financial literacy. In a US study 76% of millennials failed to demonstrate even a basic level of financial literacy, and only 8% demonstrated a high level (take the test here). I believe this is only part of the puzzle.
I argue instead that savings and investment products do not reflect the aspirations of millennials. They were conceived by a generation for whom the path to a good life was relatively unambiguous. Go to university after school, save for and buy a house in your twenties, and then work steadily in one career (and for few employers) for 40 years, gradually accumulating wealth before retirement at 65. Savings and investment products are built to reflect this.
All of the norms that underpin this life structure are steadily being eroded. Technological change means that millennials will likely change careers with greater frequency than their older peers. House price inflation, together with millennials coupling up later, mean that buying a home is no longer a certainty. How can we expect my generation to use the same financial products as previous generations to structure their lives? They are no longer fit for purpose.
In the 100 Year Life, Lynda Grattan and Andrew Scott suggest some new life phases that millennials may pass through, now that life expectancies are longer and the job market much less stable. None of these involve linear progression of both wealth and income. Instead, millennials might have a ‘portfolio career’ with multiple sources of income, devote two years to re-skilling in a new field, or engage in a period of extended travel.
In order to incentivise millennials to save, we need to design products which match this new reality. Financial products should no longer be the static offerings of high street banks but integrated and genuinely engaging experiences which reflect different life goals. To take one example, imagine a Travel Saver product which helped you to set a savings schedule, and then gradually unlocked benefits such as discounts on tours, insurance offers and preferential FX rates as you worked towards your goal.
We also have new insights coming from the increasingly popular study of behavioural economics. Having now recognised that people are more emotive than the rational actors of traditional economics textbooks, our design of savings products should incorporate rather than ignore our irrationality. Recognising the power of emotional incentives and choice architecture is vital.
In a new environment of Open Banking, in which third party apps can access account information and send payment instructions, such ideas are feasible for the first time ever. Now we can start to build products which truly incentivise millennials to save and invest towards their goals.
This is the problem I want to explore at Moneycado. Who wants to join me?